Black Box [NDQ:BBOX] June 24, 2008 close: $28.56
52-week range: $26.62 [Jan. 22, 2008] – $46.40 [Oct. 9, 2007]
Yield = $0.06 quarterly = 0.84% current yield
Black Box offers technical network services and related products to businesses in North America [84% of sales], Europe [13% of sales] and elsewhere [3% of revenues]. They list and sell over 90,000 products in their catalog as well.
In FY 2007 [ended March 2008] revenues grew marginally while EPS grew 11% going from $2.00 to $2.22. Each of the past two quarters showed year-over-year improvement and FY 2008 is projected to come in much stronger. Current FY estimates run from Value Line’s $2.90 to Zack’s $3.36 /share.
That means BBOX shares are now trading at < 12.9x trailing and < 10x even the lower forward projection. This compares with a 10-year median P/E of 18x.
Black Box has only seen a 10 multiple on two other occasions in the past decade. In August of 1998, when the technology sector crashed, BBOX dropped to $21.50 and 10.5x that year’s EPS. By mid-year 2000 they peaked at $92.30. In February of 2003 BBOX plunged briefly to $25.60 when earnings were coming in at $2.56/share. Thirteen months later BBOX hit $58.60/share.
It is expected that sales, cash flow, and book value will all reach new all-time highs in the current FY.
Value Line is using a conservative 15 multiple for their 3 – 5 year projections. Even 14 times their $2.90 estimate for the FY ending next March leads to a target price of $40.60 or 42% above today’s close of $28.56. You get a 0.84% yield while you wait for the rebound.
Is my $40.60 goal too conservative? It might well be. These shares hit highs of $46.40 and higher at some point in each of the nine calendar years from 1999 right through 2007. If Black box can earn the $3.36 Zack’s estimate, and reverts to a still below average multiple of 16, it could reach $53.76 /share by next spring.
Who else likes Black Box? As of March 31, 2008:
FMR [Fidelity Funds] ……………….. had 11.31%
Dimensional fund Advisors ……….. owned 8.43%
Sterling Capital Management ………… held 5.97%
AXA Financial ……………………….. had 5.62%
Barclay’s Global Investors ………… owned 5.26%
Royce & Associates ……………………held 4.72%
Fischer Investments ……………………had 4.11%
Deutsche Bank …………………….. owned 3.49%
Dreman Small-Cap Value Fund ………held 3.36%
Officers and Directors …………………had 10.8%
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Want a nice six-month combination with BBOX?
Try this one:
……………………………………..………..Cash Outlay………….Cash Inflow
Buy 1000 BBOX @ $28.56 ……………..…..$28,560
Sell 10 December $30 Calls @ $2.90 …………..…………………….$2,900
Sell 10 December $30 Puts @ $3.80 …………………………………$3,800
Net Cash Outlay …………………………….. $21,860
At expiration date [December 19, 2008]:
If Black Box is > $30 [which I think is very likely]:
Your shares will be called [sold] for $30,000.
Your $30 puts will expire worthless [a good thing for you as a seller].
You will have received $120 in dividends.
You will have no option liabilities.
Your cash balance will be $30,120 for your $21,860 outlay.
That’s $8,260 net profit on a $21,860 outlay or + 37.7% cash-on-cash.
Not a bad 6-month return on shares that need only go up 5.1% from today’s quote.
Risk?
Break-even on the shares would be $28.56 less the $2.90 call premium = $25.66 /share.
Break-even on the puts would be $30 less the $3.80 put premium = $26.20 /share.
Worst case, you would end up owning 2000 shares of BBOX at an average cost of $25.93/ share. That’s lower than the absolute low prices actually touched since February 2003 – more than five years ago.
Disclosure: Author is long BBOX shares and short BBOX puts.
